Floods to push up prices

2011-01-25 10:58

Australian inflation moderated to its lowest level in a decade, data showed today, but Treasurer Wayne Swan said prices would surge as record flooding squeezes consumers at the checkout.

The Consumer Price Index grew 0.4% in October-December compared with the previous quarter and 2.7% compared with a year earlier – both figures much lower than the 0.7% and 3% expected by economists.

Swan said underlying inflation – now at 2.2% – was at its lowest in 10 years, with weather-related price hikes in fruit and vegetables offset by the country’s ailing retail sector.

But the treasurer warned that ruinous flooding across vast parts of Queensland and Victoria states – key farming regions – would cause prices to jump.

“Despite the fact that these figures are lower than anticipated we do know that the next quarter figure, the March quarter, will see a spike, particularly in vegetable and fruit prices,” Swan told reporters.

“The effect of these disastrous floods in Queensland through January will be felt by Australian families at the checkout.”

Swan said fruit and vegetables, among chief inflationary pressures in the December quarter, had already appreciated due to the bad weather which preceded the deluge, but he flagged a major price spike, with crops such as beetroot and sweet potato decimated.

Australia is in the grip of a particularly strong La Nina weather system, which brought an overcast and cool season for food growers followed by a destructive inundation that wiped out untold millions in crops.

The treasurer said the flooding crisis was, in economic terms, “most probably the biggest in our history”, with significant damage to public infrastructure, for which the government must foot 75% of the bill.

“You’re dealing with tens of thousands of kilometres of roads, you’re dealing with rail, you’re dealing with schools,” he said.

Canberra had already made more than 230 million Australian dollars (about R1.6 billion) in disaster relief payments to victims “and that’s before you get to the size of the damage that is done to the private assets and belongings of so many people,” added Swan.

“Our number one priority as a government and as a nation has to be to rebuild Queensland, it’s a very important part of our economy, and we have to take that responsibility as seriously as we can,” he said.

Today’s relatively modest inflation figure is well within the Reserve Bank’s target range of 2% to 3% and points to a slowing in the mining-powered economy.

The figures will come as welcome news for the central bank ahead of a policy meeting in Sydney next week, economists say.

“The RBA can sit tight for quite some time,” said BNP Paribas economist Dominic Bryant. “There’s a lack of underlying price pressures present.”

Australia was the first major Western economy to lift interest rates following the global financial crisis, rapidly hiking the official cash rate 175 basis points from historic October 2009 lows of 3%.

Canberra in November flagged that inflation would hold at around three% in 2010-11, saying that it saw risks to the upside with the economy “expected to be operating at around capacity”.

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